Pre-Aprroval Times a changing

nutbunchSeptember 2, 2009

Before I would contact a bank of mortgage broker, they'd run my credit. Find out about the 800 FICO score and issue a pre-approval letter to me to submit with bids.

Now, I'm told by this mortgage broker that I need to submit my tax returns for 2 years, my pay stubs, copies of all my bank statments, just to get a pre-approval letter that only my agent gets to submit with offers.

Also same mortgage agent tells me that on investment property I must put 20% down and can only ask the seller for 2% back at close. I'm okay with this but surprised there are no other options, like asking the seller for more back at closing.

I don't know about buying investment property -- but do know that the paperwork the mortgage broker is requesting appears to be the new normal.

In the olden days pre approval basically meant you had a good credit score and said you made $$$, but total credit worthiness was not substantiated. Hence, some buyers had pre approval, but couldn't get loans. In essence many people were of the opinion that a pre approval letter wasn't as valuable as it should have been.

I think the new standards for getting pre approval will actually make the pre approval letter more valuable. Many banks are actually asking for pre approvals to be submitted with offers on bank owned properties. They want to insure that the pre approval is worth more then the paper it's written on.

"Back in the day" (when anything could go, almost) there *were* investor stated-income programs, and/or even no-ratio or no-doc programs... so, technically, with just your identification and credit score a full Pre-Approval *COULD* have non-fraudulently been issued to you.

Today, everything is "full doc" so in order to issue a valid Pre-Approval, all that supporting documentation has to be reviewed & verified.... else the Pre-Approval (and its source) would be invalid & irrelevant.

"Also same mortgage agent tells me that on investment property I must put 20% down and can only ask the seller for 2% back at close. I'm okay with this but surprised there are no other options, like asking the seller for more back at closing."

For 30 years I have always put at least 20% down on investment properties, and sometimes more.

The first thing I have always used to start determining how much I need to put down is what is needed to have at least a neutral cash flow (before depreciation, etc.) based on rents. Putting more capital into an investment every month is not a good long term strategy.

You are effectively de-leveraging the investment and reducing the rate of return badly (as in negative).

While I have bought many properties that I needed to put additional money into for renovation and repairs, that is factored into the purchase price I will offer.

frankly--I think you should be able to ask for anything you want and might get from the seller--
the reason the mortgage agent says you can only ask for 2% back is that is the ratio they think a financially viable buyer would "need" to close the deal...

There is "back in the day," and REALLY back in the day. We older people will tell you that 20% down was the norm for all housing for many years. There were special programs for putting 10% or 5% down, but you and the house had to qualify, if I remember right. Then you also had to prove that the down-payment money was not borrowed from relatives, but was actually yours. I think we had to get "gift letters" if relatives were helping with down-payments, and only so much of the down-payment could be a "gift." We bought our first house in 1985. Housing prices in our area were rising faster than we could save. My then-DH always blamed the rising prices on families who had money to give their kids for buying a house, and on two-earner families. We were in neither category. We barely got into the real estate market.

People who were used to this kind of big-brother regulation that kept you from getting in over your head (there was also a limit on how much of your income could go to housing costs, and I think it was 28%) were confused when all of a sudden people could buy houses with nothing down and not enough income to make the payments.

I truly believe that a lot of people who got into trouble in the housing boom believed that the banks were still keeping tabs on whether you were a good risk, and if they loaned you the money, that meant that by their calculations, you had a good chance of being able to pay off the loans they were offering. After all, the banks had always been strict about how they made their mortgages. No one came out and said, "From this day forward, the banks/mortgage brokers don't care if you can make your payments, and might be betting that you won't be able to keep up and will lose the house." Too bad a page with that sentence in an 18 pt font was not included in the HUD disclosures! I know that folks on this forum and at the Garden Web in general are savvy enough to have known this, but middle America working class did not - at least the part where I came from. I doubt that my family members ever understood their mortgage papers.

So we are back to banks playing big brother. We have to prove that what we are saying about our finances is true. It just sounds like responsible lending to me.

When DH and I bought a house in Seattle in 1989, the bank (a S&L) required almost everything but our first-born. We even had to submit college transcripts from 20 years earlier. I thought it was ridiculous. They finally approved our loan 2 hours before closing and we had a cash buyer waiting if the loan didn't go through. Although pre-approval wasn't something that was routinely done 20 years ago, the stuff we had to go thru and submit to get a loan approved was far worse than anything we've had to deal with since.

We bought our home four years ago ($210K) and were able to have the lender run a credit check and we got a pre-approval letter right away. Our credit was very good and we had no other debt. We also had nearly 30% as a down payment so that may be why it was pretty hassle-free.

We will be putting this home on the market either spring '10 or spring '11 since we are downsizing and have only one child left at home and he will be 17 years-old on his next birthday.

We would like to purchase in the $120K range and plan on having about $70K to put down on the retirement house. My goal is to have only a 10 year mortgage because I would like the house paid off as that would give me peace of mind.

When we are ready to buy I figure that we will have to show our tax returns for the previous few years. My husband has been retired for 6 years so there are no pay stubs. We have bank statements so that might be useful.